Question

Exercise 16-12 Determining the payback period LO 16-4 Baird Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $23,800,000; it will enable the company to increase its annual cash inflow by $6,800,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,920,000; it will enable the company to increase annual cash flow by $9,700,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a. Determine the payback period for each investment alternative and identify the alternative Baird should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.) Payback Period a-1. Alternative 1 (First plane) Alternative 2 (Second plane) a-2. Baird should accept Prev 2 of 3

Answer 1

Solution:
Payback period = Initial investment / Annual cash inflows

Alternative 1 (First plane) = $23,800,000 / $6,800,000 = 3.5 years

Alternative 2 (Second plane) = $34,920,000 / $9,700,000 = 3.6 years

Baird should accept alternative 1 (First plane)